Can Africa Balance Growth with Reform?

The challenge for Africa is to add value to the raw material and get it to foreign markets Just In Time. Photo: iStock

The latest African Economic Outlook contains plenty of positive news and data. But can the governments which helped fuel the booms keep pace?

Economic growth is starting to look very different between North Africa and sub-Saharan Africa. In the North, with the long tail of the Arab Spring still unwinding, growth in 2014 is projected to be just 1.9%. Sub-Sahara African growth is scheduled to be 4.8% in 2014, rising to 5-6% in 2015. These are figures not seen since before the global economic crisis of 2009.

The African Economic Outlook report is produced annually by the African Development Bank, the OECD Development Centre and the UN Development Programme. The latest report, published in May 2014, argues that much of the growth will come not from simply increasing exports of raw materials, but from adding more value. This means becoming a major player in the global value chains.

It gives the examples of Ghana, Kenya and Ethiopia, where the development of agribusiness value chains have contributed to both economic growth and job creation.

Entrepreneurs and Higher Value Activities

For those strong growth figures to be realised Africa needs entrepreneurs and a viable workforce. It has both, indeed the working age population between 2000 and 2007 grew by 96 million yet the number of jobs grew by 63 million. There is clearly a workforce that needs employing and employment.

The growth of African economies in higher-value activities, says the report, ‘involves investing in new and more productive sectors, building skills, creating jobs and acquiring new technology, knowledge and market information. These interventions require sound public policies.’ Those sound public policies are coming into place and are working in some areas. The report cites the remarkable turnaround in the South African automotive industry. An increasingly strong performance has been achieved partly by removing obstacles and providing incentives for component producers and assembly lines.

Importance of Macro Management

However, Mthuli Ncube, Chief Economist and Vice President of the African Development Bank, says there should be no let up in the effort to improve. ‘Any slackening on macro management will undermine future economic growth’, he said.

Writing in This is Africa, Angel Gurria and Macky Sall lay out the conditions for growth to continue:

‘For this to happen, a series of reforms appear indispensable: step up investment in education and vocational training; boost infrastructure and power generation; strategically manage oil and other natural resource revenues; encourage innovation and inter-sector linkages; improve governance and enhance regional integration.’

But the key to reform is the tax base. On some measures this is encouraging. The This is Africa report points out that, on average, African countries collect more than ten times in taxes what they receive in official foreign aid. Similarly, between 2000 and 2011, Africa’s annual tax revenue went from $155bn to $514bn.

The Tax Take

However the African Economic Outlook points out that tax mobilisation remains very low. In many OECD countries tax revenues make up an average of 35-37% of fiscal revenues, but in many African countries it remains less than 15%.

Nigeria’s recent rebasing exercise demonstrated that the country’s economy had grown hugely, and had overtaken South Africa as the largest in the region. Yet tax mobilisation represented just 5% of revenue.

Mario Pezzini, Director of the OECD Development Centre, sees this as putting a potential limit on what can be achieved. ‘At a certain point, productivity can reach a roof exactly because what is lacking is not within the firm, but outside [of it]’, he told This is Africa. ‘If the public goods are not there, this will be a strong roof for further development.’

For example, for a Moroccan farmer working with a European supermarket, he will have to be able to get his grape crop to the destination at exactly the time agreed. That means not only does he have to have his farm organised, but he has to have a good road network, efficient export procedures and much else.

Africa needs to continue to invest in infrastructure at all levels, but it is becoming clear that this is partly because of the success of individuals and companies within Africa who are powering the continent ahead – Africa is growing at a faster rate than Latin America and the global average as a whole.

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